What Is a Social Security COLA, and How Can It Affect Your Retirement Plan in 2025

these annual increases can help you keep up with inflation but probably not as much as you think inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair former baseball player Sam euwing that quotation is amusing and it's instructional too because it's rather out of date due to inflation one recent estimate of the average cost of a haircut for men was $28 as of last year with another source offering a range of $20 to $40 Savvy folks understand that inflation is always is with us to various degrees and that it will erode the purchasing power of our dollars over time this can be particularly important for retirees imagine for example that you retire at age 62 if inflation averages 3% annually over the next 25 years by the time you're 87 potentially with another decade of life ahead of you whatever cost you $100 when you were 62 will cost you about $29 by the time you're 87 so if you're planning now to be buying a new $ 35,00 car in the future it might cost you $50,000 or even $770,000 anyone engaging in retirement planning as we all should be doing should be considering inflation Social Security and inflation when it comes to Social Security and inflation there's both good and bad news for starters Social Security does protect beneficiaries from inflation to some degree it does so via cost of living adjustments cus that happen almost every year some people see these as annual raises but they are not really increases in your purchasing power they simply increase your income in an attempt to keep up with the ever shrinking purchasing power of the dollar Social Securities Cola and your retirement so you can expect inflation related increases from social security throughout your retirement but don't expect them to be perfect since everyone's spending is different each Year's Cola will offer different degrees of relief for example if healthcare costs rise much faster than other expenses and you spend a lot on Healthcare a cola that's based on a wide range of price categories won't fully make up for healthcare increases colas are based on the Consumer Price Index for urban wage earners and clerical workers CPI which is calculated by the Bureau of Labor Statistics based on changes in the average prices of household goods such as food housing and transportation some feel that this is not the best measure of inflation for retirees because it's focused on costs borne by workers not on retirees expenses